SUPREME COURT OF THE UNITED STATES

No. 95–1764

SARATOGA FISHING COMPANY, PETITIONER v.

J. M. MARTINAC & COMPANY and MARCO

SEATTLE INC.

on writ of certiorari to the united states court of appeals for the ninth circuit

[June 2, 1997]

Justice Scalia, with whom Justice Thomas joins, dissenting.

In East River S. S. Corp. v. Transamerica Delaval Inc., 476 U. S. 858 (1986), we adopted as part of admiralty law the so-called "economic loss" rule, which denies the purchaser of a defective product a tort action against the seller or manufacturer for purely economic losses sustained as a result of the product's failure. Applying this rule, we held that a plaintiff may not recover in tort when a defective product damages only itself, but may recover for personal injuries and for damage to other property. See id., at 871–875. The present case involves a relative detail of application of the East River holding: whether, and under what circumstances, "other property" can include property added to the defective product, not by the plaintiff-purchaser himself, but by some earlier purchaser in the chain of ownership leading back to the manufacturer. In the context of the present case, the question is whether a skiff, a net, and communications and navagational electronics added by Joseph Madruga to the M/V Saratoga before she was sold to petitioner constitute part of the product itself (for which recovery is not available) or "other property" (for which recovery is available).

It would have been better, in my view, not to grant certiorari in this case. By the time East River was decided, we had a wealth of lower-court development to draw upon, including well reasoned opinions taking no less than three distinct positions on the economic-loss rule. See id., at 868–871. We could be confident in our decision, knowing that it broke little new ground; the rule we adopted had been endorsed by a majority of state courts and had been tested for two decades since its enunciation by Chief Justice Traynor in Seely v. White Motor Co., 403 P.2d 145 (1965). In the present case, by contrast, the Court sets sail into uncharted seas. Not a single lower-court decision (other than the one under review) has addressed the precise question presented: the status as "other property" of additions made by a prior purchaser who was a user. I would feel less uncomfortable about our plying these unknown waters if we were skilled navigators. But unlike state courts, we have little first-hand experience in the development of new common-law rules of tort and contract governing commercial transactions. Better to have followed some state-court pilots than to proceed on our own—and even, perhaps, to lead state courts aground. With this disclaimer, and with the admission that I am only modestly more confident of my resolution of this case than I am of the Court's, I proceeed (reluctantly) to discussion of the merits.

The Court's opinion suggests that this is a rather straightforward case. The relevant facts—according to the Court—are quite simple, showing: "(1) a Component Supplier who (2) provided a defective component . . . to a Manufacturer, who incorporated it into the manufactured product (the ship), which (3) the Manufacturer sold to an Initial User, who (4) after adding equipment and using the ship, resold it to a Subsequent User." Ante, at 3. What the Court's opinion does not disclose is that Madruga—the Court's "Initial User"—was perhaps not only a user of the boat but also an entrepreneur in the business of designing, assembling and distributing what might be described as "fully equipped tuna-fishing machines." The M/V Saratoga was not an isolated purchase by tuna-fisherman Madruga from Martinac, but was the third of seven steel-hull tuna seiners Madruga commissioned. She was designed, in part by Madruga, specifically for use as a tuna seiner, and her construction at Martinac's shipyard was supervised personally by Madruga and by an engineer in Madruga's employ. Madruga negotiated over the specifications and equipment for the vessel and ordered numerous changes to it during the course of construction. When delivered by Martinac, the M/V Saratoga was certainly functional as a boat, but it was not yet capable of performing the task for which it was specially designed. It was arguably still just a component of a larger tuna-fishing machine that would not be complete until Madruga installed the seine, skiff, and elec- tronic equipment; and arguably a component of a tuna-fishing machine that Madruga was in the business of marketing.

As respondent points out, there is no finding in the record as to whether Madruga was engaged in the business of selling such products and the issue was never raised or considered. Brief for Respondent 33, n. 28. I assume that the Court disregards this issue (neither resolving it nor remanding for its consideration) because the Court deems the question irrelevant. Under the Court's test, as I understand it, the "product" is fixed when it is sold to an "Initial User," even if that user is also in the business of modifying and reselling the product. In my view, there is little to recommend such a rule.

The Court is driven to take the position it does by the concern that liability would otherwise turn on "a fortuity, namely whether a defective product causes . . . harm to the added equipment before or after an Initial User (who added the equipment) resells the product to a Subsequent User." Ante, at 6. But the initial-user rule the Court embraces simply makes liability turn on a different fortuity, namely whether the person who adds additional equipment to the product uses that product before selling it. If Madruga was engaged in the business of assembling and distributing tuna seiners, why should the fact that he briefly used the vessel before selling it enable petitioner to obtain tort damages that would plainly not be recoverable if Madruga had simply installed the components and sold the vessel? Or put in more commonplace terms: Why should the buyer of a car whose engine catches fire and destroys the entire vehicle be able to recover in a tort action against the manufacturer for the value of the dealer-added hi-fi stereo system if the car was a "demo," but not if the car was brand new?

One rule that generally avoids making liability turn on either of the above described "fortuities" is what might be called the "last-402A-seller rule." Under this rule, the "product" would be fixed when it is sold by the last person in the chain of distribution who is, in the words of §402A of the Restatement (Second) of Torts (1964), "engaged in the business of selling such a product." This would offer at least as much predictability as can be expected from the Court's approach, would ensure that the availability of tort remedies will be uniform with regard to all end-users, and would avoid making liability turn on the seemingly irrelevant question of whether the distributor of the product used it before sale. The last-402A-seller rule is also more consistent with one of the principal considerations underlying our decision in East River: the desirability of invoking tort protection only where contract-warranty protection is infeasible. Defining the product as what was sold by the last person engaged in the business of selling such products denies tort recovery for those additions to the originally manufactured product which the purchaser could have covered by warranty protection (persons in the business will generally offer warranties covering the entire product; user-sellers will generally not).

The last-402A-seller rule appears to me superior to the initial-user rule adopted by the Court today, but the two are in reality quite similar and will in most cases produce the same result. Each essentially attempts to differentiate between additions made before and after the product has left the market chain of distribution. I doubt, however, whether leaving the market chain of distribution ought to be so momentous an event for the purpose at hand. So long as the plaintiff is a commercial entity (and I understand the rule under consideration to be one applicable only to to commercial, as opposed to consumer, transactions, see ante, at 3) it seems to me to make no difference whether the purchase was made from a "402A seller" or not. Commercial entities do not typically suffer, at the time they make their purchase, a disparity in bargaining power that makes it impossible for them to obtain warranty protection on the entire product; nor are they unable to insure the product they have purchased, including those portions of it added by upstream owners. Our decision in East River suggests that in such circumstances there is inadequate reason to interfere with private ordering by importing tort liability—that is, inadequate reason to permit the purchaser to recover any tort damages for loss of the product he purchased. See East River, 476 U. S., at 872–873.

In recognition of that reality, an impressive line of lower court decisions, applying both federal and state law, has held that the purchaser of a product damaged by a defective component cannot recover in tort against the manufacturer of the component on the theory that the remainder of the product is "other property." See, e.g., Pulte Home Corp. v. Osmose Wood Preserving, Inc., 60 F. 3d 734, 741–742 (CA11 1995) (Florida law); American Eagle Ins. Co. v. United Technologies Corp., 48 F. 3d 142, 144–145 (CA5 1995) (Texas law) Transport Corp. of America, Inc. v. International Business Machines Corp., 30 F. 3d 953, 957 (CA8 1994) (Minnesota law); King v. Hilton-Davis, 855 F. 2d 1047, 1051–1053 (CA3 1988) (Pennsylvania law), cert. denied, 488 U. S. 1030 (1989); Shipco 2295, Inc. v. Avondale Shipyards, Inc., 825 F. 2d 925, 928–929 (CA5 1987) (federal maritime law), cert. denied, 485 U. S. 1007 (1988). Although the holdings of these cases are not precisely on point (since the plaintiff was the initial purchaser-user of the defective product), the rationale of those decisions is in tension with the Court's holding today, and supports what might be called an "object-of-the-bargain" rule. They rest on the premise that one must look to the product purchased or bargained for by the plaintiff in determining whether additions constitute "other property." See, e.g., King, supra, at 1051 ("In determining whether a product `injures only itself' for purposes of applying the East River rule . . . one must look to the product purchased by the plaintiff."); Shipco 2295, supra, at 928; American Eagle, supra, at 145; Casa Clara Condominium Assn. v. Charley Toppino and Sons, Inc., 620 So. 2d 1244, 1247 (Fla. 1993) ("The character of a loss determines the appropriate remedies, and, to determine the character of loss, one must look to the product purchased by the plaintiff, not the product sold by the defendant."); see also Fox & Loftus, Riding the Choppy Waters of East River: Economic Loss Doctrine Ten Years Later, 64 Def. Couns. J. 260, 264, n. 29 (1997) (citing numerous other cases and observing that "[t]he trend in defining `economic loss' is to focus on what the plaintiff purchased rather than what the defendant agreed to provide"). These courts have adopted this purchaser-oriented approach on the belief, which I think correct, that it is in accord with the policy judgments underlying our decision in East River. As the Third Circuit in King explained:

"As we read East River, it is the character of the plaintiff's loss that determines the nature of the available remedies. When loss of the benefit of a bargain is the plaintiff's sole loss, the judgment of the Supreme Court was that the undesirable consequences of affording a tort remedy in addition to a contract-based recovery were sufficient to outweigh the limited interest of the plaintiff in having relief beyond that provided by warranty claims. The relevant bargain in this context is that struck by the plaintiff. It is that bargain that determines his or her economic loss and whether he or she has been injured beyond that loss." 855 F. 2d, at 1051.

There are undoubtedly other rules that can be—and have been-–conceived of. One recent article describes the current state of the law regarding damage to "other property" on construction projects as follows:

"There has been a growing trend in many jurisdictions to interpret `economic loss' broadly to include damage that formerly was considered `other property.' Courts that follow this trend have utilized the following rationales:

"•There is no damage to `other property' where the damage extends only to property within the confines of the bargain. . . . `Other property' does not include damage to property if those losses are direct and consequential losses that were within the contemplation of the parties and could have been the subject of negotiations between the parties.

"•The phrase `other property' does not include the type of property that one would reasonably expect, on a foreseeability test, to be damaged as a direct consequence of the failure of the product at issue.

"•No `other property' has been damaged, because the allegedly defective product has been incorporated into the structure that has been damaged.

"•Losses caused by the inferior quality of the product must be considered `economic' and therefore cannot be considered `property.'" Fox & Loftus, supra, at 264–265 (footnotes omitted).

And there can of course be combinations of the various rules. For example, one might adopt an "integrated unit" exception to the initial-user rule that the Court announces today.

As I have confessed above, I have little confidence in my ability to make the correct policy choice in an area where courts more experienced than we have not yet come to rest. I would have been inclined to let the lower federal courts struggle with this issue somewhat longer, in the hope that there would develop a common-law consensus to which we could refer for our admiralty rule, as we did in East River. Put to a choice, however, I would not select the rule adopted by the Court today. I would adopt the rule proposed by respondents and define the "product" for purposes of East River's economic-loss rule as the object of the purchaser's bargain. That was essentially the approach followed by the Court of Appeals below, and I would accordingly affirm its judgment.

I respectfully, and indeed diffidently, dissent.